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Q:
The Cupcake Factory plans to start a new retail store in Medina, Ohio. The Cupcake Factory may sell specialty cupcakes for $5 per cupcake (every cupcake has a variable cost of $2.) The company is negotiating its lease for the new Medina location. The landlord has provide two leasing options:
1) a lease of $2,000 per month; or
2) a monthly lease cost of $1,000 plus 4 percent of the company's monthly sales revenue.
Question 1) If the Cupcake Factory plans to sell 1,000 cupcakes a month, which lease option could cost less each month? Why?
Question 2) If the company plans to sell 1,800 cupcakes a month, which lease option could be more striking? Why?
With an annual production rate of 5,000 units, how long will it take to reach break-even point of using automated equipment?
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